This is a blog that I started in october 2010, mainly for discussing my ideas on the economy, taxation and politics. Please add comments - I'll do my best to reply. If you are new, I would recommend watching one of my YouTube presentations (in French or English). You can download a fully indexed pdf version (over 800 pages) here.

25 Mar 2012

How to introduce the 0-0-0-0.x Plan progressively

I get the impression that people are starting to notice, and that my decision to post English and French versions of my presentation on the 0-0-0-0.x Plan was a good move. Spread the word!

There is one point that I haven't discussed in the presentations. It's the question of how to get from the current situation based on hopelessly inefficient and unfair taxes to the state of bliss that would result when all the current taxes have been scrapped and replaced by a single flat-rate financial transaction tax that would be automatically adjusted to match government revenue to expenditure.

Obviously, I would encourage politicians to bite the bullet and implement the whole thing in one fell swoop - for example on the 1st of January 2013. But I realize that this may be a trifle optimistic.

Many people seem to be worried that while the FTT rates needed to replace the existing tax system can be very low (0.08% in the USA, 0.05% in the UK, and around 0.3% in France), those figures assume that the introduction of the tax would not substantially affect the volume of transactions. I agree that this may be unrealistic. But I am not aware of any economists that can model this realistically either. That is why my proposal of automatically adjusting the FTT rate to compensate makes good sense. Of course, the 64 million dollar question (or 64 trillion dollar question) is what will be the final rate once the system has settled down. Don't forget that the first country to implement the change would reap the benefit of scrapping corporation tax, which would allow the tens of trillions of profits currently stashed away in taxhavens to be brought back into the economy. Thus the drop in activity caused by the introduction of the FTT could easily be completely swamped by a massive increase in the money being brought back into the system. I'm pretty certain that no economist has a decent model that can predict that.

So, are there any alternatives to bringing the switch in a sort of big-bang event? You could argue that you might use the FTT to replace the various taxes one by one. For example, I'm sure that the banking and financial sector could be interested in trading a small FTT for the elimination of Corporation Tax. But why chose Corporation Tax first? Why not scrap VAT first? Or Income Tax? Any attempt to prioritize the abolition of a particular tax could easily be described as pandering to a particular pressure group. And it would lead to endless wrangling.

The answer could be an idea suggested to me last night by someone who would prefer to remain anonymous (!) I respect that, even though that person could retrospectively deserve a lot of credit!

Here's the idea. Rather than replacing all the taxes at once, or replacing them one by one, how about reducing all the taxes by a fixed proportion and using the variable rate FTT to make up the difference? Suppose that the government decided to reduce all the tax rates by 25%. In the UK, VAT would drop from 20% to 15%, corporation tax from 24% to 18%, and all the different tax bands would drop accordingly. Since all the taxes in the UK raise around £540 million, it follows that the FTT would only need to generate £135 billion, which, given visible transactions running at £1760 trillion a year, could be achieved with a global FTT of under 0.01%. That value is so low that it seems almost inconceivable that it could cause a major drop in transaction volumes.

If, as I would predict, the revenue really is around £135 billion, the move could be followed after a relatively short period by the removal of the remaining taxes - either by further stages, or all at one go.

Not bad, eh? Of course, you now have to decide what percentage drop to use. Should it be 25%? Or 5%? Or 50%? I'm somewhat concerned that we could easily spend years trying to decide what the optimal value is, whereas we should just go ahead and do it. But I agree that having an alternative to a "big-bang" implementation may well be reassuring for many.

2 comments:

I much like this mellowed version. It's good to see that the idea becomes more and more mature.

ad corporation tax: if you can scrap or reduce it, not only would you get the money flowing back from tax havens, as you suggest, you probably would invite a load of external investment, plus a lot more people taking the risk of doing business domestically.

Remember, one of the big arguments against the FTT or any TT, always was that it cannot be done unilaterally, because transactions would go abroad. I do not think people who argued like that considered your idea of scrapping other taxes at the same time, which could propel the stagnant Western economies onto an entirely different level, *and* increase "necessary" domestic transactions(!!!). And the first one who does it will have a huge edge.

So, France, come on! The inventor of the VAT could show to the world again, how it is done! :-)

Yep. I think that a progressive introduction could well be a good way to convince the skeptics. I have quite a few people, including my son Jonathan, who are convinced that any introduction of an FTT will lead to a complete collapse of transactions - numbers like 99% get mentioned. Of course, nobody can really model this. I've asked economists, and they don't seem to have any way of making a serious prediction. So, starting with replacing X% of all the current taxes with a callibrated and automatically adjusted FTT could indeed be a good way of measuring the effect directly.

Of course, I would like people to maintain the vision of scrapping the whole lot in the medium term, because it is only at that point that all the other advantages kick in - absence of evasion, total fairness, painless tax collection, very cheap tax collection, elimination of money laundering and criminal activity, an end to political corruption by lobbyists, the end of the huge advantage for multinationals etc etc etc...